Question

Your contribution to the discussion requires 1-2 paragraphs, use of proper grammar, and citing of sources. Participation in the weekly discussion provides the opportunity to learn and apply new information in manageable amounts of timely contributions, and to receive useful feedback.

Referencing textbook readings, lecture material, and current business resources explain methods for estimating cost of debt, methods of estimating cost of equity. Also, discuss the difference between asset and equity betas used in CAPM to estimate cost of equity.

If WACC is so sensitive to accurate estimation of its components (weights and individual costs), why is it still so widely used in the industry? How would you improve quality of capital budgeting process that relies on using WACC?

Answer 1

Wacc indicates the minimum rate at which the company should earn from the business in order to give a return to its finance providers, as per their expectations. So here using this we can estimate the return we needed for the smooth performing of the company.

There are some problems related to wacc calculation. Here we are using the wrong tax rate. using the book value of debt and equity instead of the correct valuation with that we consider capital structure that is neither the current nor forecasted structure. So it should be corrected

Eventhough these are not big deals because we can correct these manually and we can make adjustments by doing so. For proper investment decision we should aware anout the debt and equity mixture in the company so by using this method we can able to calculate the perfect allocation of these.

ThankYou...